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The banking industry’s profitability would be affected to the tune of Rs 30,500 crore in FY18 following the 110 basis points rise in bond yields in the last six months, India Ratings has said.
Out of the total potential loss, the share of PSU banks will be Rs 24,800 crore in FY18 (FY17: profit of Rs 42,700 billion) and that of private sector banks will be Rs 5700 crore (profit of Rs 20,100 crore). The resulting treasury loss will impact the renewed vigour post announcement of bank recapitalisation. In FY17, banks reported a gain on treasury of Rs 59,800 crore.
India Ratings and Research (Ind-Ra) said public sector banks (PSBs) would continue to report losses in FY18. The large losses emanating out of the quick rise in bond yields especially in the last six weeks will result in large mark-to-market losses on lenders’ non held-to-maturity investment holdings. “This will lead to a considerable fall in the banking industry’s treasury income in 4QFY18 with a spillover effect in FY19,” it said.
On February 9, State Bank of India reported a loss of Rs 2,416 crore and Bank of India Rs 2,341 crore loss for the third quarter due to under-reporting of bad loans and losses in treasury operations.
It said midsized banks would be the worst hit, considering their proportionally swollen treasury books, after a period of muted credit and large deposit growth, and a steeper treasury profit booking in FY17.
After successive fall in bond yields starting from January 2015, rates have hardened from July 2017. The 10-year benchmark yield has moved up to 7.60 per cent in January 2018 from 6.50 per cent as on July 2017, up 110 bps in six months.
The banking systems’ investments increased significantly in FY17 and FY18 as banks constrained by capitalisation and low credit offtake parked their deposit accretion in low risk weight government securities. As the yields were falling, some banks used realised gains to offset the profitability pressure on the core business. As the interest rate curve shifts, many of the banks, especially mid-sized banks could face large provisioning requirements.